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The Weekly Rap! Friday May 24th, 2013

Stocks fell this morning on light pre-holiday volume, as concerns about Fed policy and recent volatility in global markets kept buyers on the sidelines. The Dow last traded at 15,289. The S&P 500 is trading at 1,647. Gold is trading higher at $1,387 an ounce, while oil futures at $93.88 a barrel. Gas prices, (Regular in El Dorado Hills, Costco, AM/PM), are at $3.85/Gal.

Yields on 10-year Treasury notes, which move inversely to prices, last traded at 2.01%. 30-year Treasury Bond yields last traded at 3.17%. Mortgage Bonds have traded much lower this week following Bernanke’s comments. On Wednesday alone Fannie Mae MBS (Mortgage Backed Security) with 3% coupons fell nearly 1 point to their lowest levels in a year and about five times the magnitude of a typical trading day. MBS yields are interest rates at which banks sell their loans into Fannie Mae and Freddie Mac bond programs. Rising yields mean higher consumer-mortgage rates.

The FNMA 30-year fixed 3.0% coupon, containing 3.25-3.625% mortgages, pretty much the benchmark or how rate sheets are priced these days is currently trading at 101.62, which is 2.00 pts worse than where we were just two weeks ago and 1.00 pt worse than last Friday. Basically each percent change in the price of the security translates to the price (or points paid or credited) of the mortgage rate. The higher the number (price), the better the rate.

In economic news this week; The reader’s digest version is the economy looks to be picking up slightly, with the emphasis on slightly, and the Fed doesn’t know what it wants to do but is shaking up the Markets none the less.

The bond market got rocked again this week on rumblings from the Fed regarding their Bond and Mortgage purchases. If you’ve been reading this then you know that I’ve been warning of this for some time. Markets react to the slightest hint of change and it’s like rats deserting a sinking ship, everyone (traders) wants to be the first one out. Now this could be overblown and we could recover from the panic but take it as a warning, when the Fed has to unwind this “stimulus” markets will unwind as well.

Head Fed Chief Ben Bernanke this week speaking before congress made a few statements that the markets took to mean that the economic stimulus (purchases of mortgages and bonds to the tune of 85 BILLION per month) the Fed has been pumping into the market is about to come to an end. The Fed could slow down its asset purchase program in the next few months he told congress. “In the next few meetings, we could take a step down in our pace of purchase,” Bernanke said in a question-and-answer session with the Joint Economic Committee. He noted that there has been “some improvement” in the job market, and the central bankers will focus on whether this continues, “and there is confidence that it is going to be sustained.” But then to contract and confuse us all he stated “A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,”

According to the minutes of the Fed’s April 30-May 1 meeting released this week, a “number” of the Fed Gods although there was no consensus, were willing to slow down asset purchases as soon at their next meeting in June. On the other hand, a “couple” of Fed officials said the Fed might have to ease more if inflation fell further. One Fed official wanted to stop the bond purchases immediately, while another wanted to increase the size of the program. This really give me a comfort feeling (read sarcasm) that the Fed Gods have no real clue what to do and definitely are not acting as a cohesive group.

Existing-home sales rose in April to hit the highest rate since November 2009, pointing to an ongoing recovery supported by low interest rates and pent-up demand. Existing-home sales rose 0.6% in April to an annual rate of 4.97 million, according to the National Association of Realtors. Sales of existing homes in April were 9.7% higher than during the same period last year. Both first-time buyer and investor buying trends have remained steady over the past six months, suggesting that the recent rebound in home prices has not yet become an issue for buyers. Inventories rose 11.9% in April to 2.16 million existing homes for sale. April tends to have the highest inventories of the year. The supply rose to 5.2 months in April from 4.7 months in March. Distressed-property sales fell to 18% of all transactions in April, the lowest since data collection began in 2008. Sales of new homes edged up 2.3% in April to the second-highest post-recession level

Orders for durable goods climbed 3.3% last month after a revised 5.9% drop in March. Higher demand for autos, airplanes and military wares boosted orders for long-lasting goods in April, but orders also rose in most other industries in a positive sign for U.S. manufacturers. If the volatile transportation sector is excluded, orders rose a smaller 1.3% but demand was still broad based. Almost every key sector reported higher orders. This latest report offers a ray of hope for a segment of the economy that has shown softness over the past few months in an array of other indicators.